While rough diamonds have traditionally been sold either via direct negotiations or through a Sight system, mining companies are increasingly moving towards tenders – an auction by any other name – as a way of selling their goods. While the traditional negotiation methods are not likely to be wholly replaced by tenders in the near future, these auctions offer an alternative – and sometimes more effective – way of selling rough. Most of the mining companies, from Alrosa to Petra use the tender system, but two companies in particular – BHP Billiton and Diamdel – have taken the selling channel beyond just the basic auction format, as Danielle Max explains.
BHP Billiton: Lucky Number Three
Companies looking to buy rough diamonds from multi-commodities miner BHP Billiton have not just one but three options. The miner offers a Spot Market, a Term Market and an auction of bigger goods (+10.8 carats) and each month, around 50 companies take part in the various auction systems.
First up is the Spot Market. Contracts bought and sold on these markets are immediately effective.) But unlike regular Spot Market,s where goods are sold for cash and delivered immediately, the price paid for the goods is not necessarily the highest bid placed, nor is there a starting or minimum price.
The reason for the price differentials is that when placing a bid, each participant also has to state the amount of goods they wish to purchase for each bid, or the number of Splits – a certain amount of goods of a certain type (this is essential equivalent to what is referred to in the industry as a Box).
BHP then builds a demand curve from the bids placed, starting from the highest price, until it meets supply. This means that the highest bidder will be allocated goods according to his bid, the next bidder will get goods according to their bid, and so on, until all the goods of a particular type have been allocated. Since November 2009, the final price paid for the goods is the highest losing bid.
For example, if four bidders were bidding for three parcels, the final price would be the price offered by the fourth bidder who does not win but has the pleasure of setting the price for the winners. This is known as the Clearing Price.
While it seems complicated, BHP uses this particular method to find out the true market prices of the goods. Today, as much as 45 percent of the production from the Ekati mine in Canada is offered via this channel.
About 55 percent of the Ekati production is offered via the Term Market. Whereas Spot Market purchases are one-offs, Term Market goods are available to traders for extended periods as a way of ensuring long-term supply. These are contracts for 15 cycles, or 18 months with options for customers to exit after each six-month period
In the Term Market, bidders bid for long-term supply contracts. The price of the goods in these contracts is determined by the Spot Market Clearing Price (SMCP) every month, and companies bid in the Term Market starting at a discount to the SMCP. The price rises until the demand matches supply.
For example if there were 10 bidders each wanting one parcel at 5 percent discount to the SMCP, demand would be 10 and supply would be five, so the price would rise to 4 percent discount to the SMCP. At this price, maybe demand would lower to seven and supply would still be only five, so again the price would rise to a 3 percent discount to SMCP. At 3 percent of SMCP perhaps demand would lower to five and at this point demand, five, would match supply, five, and so the contract would be sold. As with the Spot Market, the final price to be paid in the Term Market is the highest losing price.
In the Term Market, bidders are able to see the number of bidders’ demands, but they cannot see who they are bidding against and nor can they see the price other bidders are offering.
The quantity of goods awarded is subject to production but each company will receive similar volumes throughout the life of the contract.
Finally, the specials auction is conducted online in an ascending-clock auction format.
Companies are allowed to participate in more than one of the auctions depending on their particular needs.
Since 2008, all three tender channels have been opened to non-BHP Billiton clients who are in good standing with the Responsible Jewellery Council. There is, however, a long waiting list, so even an impeccable record is no guarantee of immediate access to the goods.
Diamdel – Internet Auctions
In January 2008, Diamdel, a subsidiary of De Beers, which supplies the secondary market, launched its system of online rough diamond auctions, which are operated alongside its traditional method of offering rough via direct sales.
At the time of the online auction launch, the company said it had added the sales channel in response to demand for it goods. According to its website, “Demand for many Diamdel products has reached a level of customer oversubscription that makes existing direct sales approaches unviable and unsustainable.” Therefore, it says the online format is “the most efficient way for those goods to be sold is via market determined distribution and prices.”
As such, the company says its business strategy going forward is “designed to make a wide variety of rough diamonds available to as many reputable clients in the market and as frequently as possible.” The goods on offer rough from the DTC, goods from 3rd parties, goods direct from producers and also special stones – larger, rarer stones – when they are available.
The online auction model was an immediate success. At the first auction, Diamdel made its most profitable sales in years, selling 16 lots to 14 buyers around the world in areas including Belgium, Israel, India and the Far East (U.S. companies are not eligible to participate in Diamdel auctions owing to parent company De Beer’s status in America).
The percentage of rough sold via the online auction channel versus the direct sales channel varies significantly from month-to-month according to shifts in availability of supply from the DTC and 3rd party sources, both in terms of volume and the type of rough, and client demand. “Since we started auctioning on January 28, 2008, we have sold as little as 12 percent of total sales via our online auctions and in some cycles in excess of 50 percent of total sales,” says Neil Ventura, Diamdel managing director.
There are price differentials between traditional direct sales and online auctions, but Ventura stresses it is important to understand the reasons for the differences.
The first reason is the different methods of negotiation. “Diamdel auctions involve many buyers negotiating with each other to determine the price whereas during direct sales our clients negotiate directly with members of the Diamdel sales team,” says Ventura.
The second difference he mentions is that there is usually more information available to clients participating in auctions, particularly relating to prices offered by competitor bidders than is made available during other sales methods (direct sales or tenders). “This is important as it ensures bidding clients have more information available to them so that can make a more informed purchase decision.”
Thirdly, he says, in order to accommodate the desire of its international client base, Diamdel tends to hold its auctions at different times to its direct sales. “As we all have seen vividly over the last 12-18 months, market conditions and prices can shift significantly in a short space of time. So, the timing of the sales is different with both channels. Often the clients negotiating with us are not the same during direct sales and those participating at auctions and lastly there are usually differences in the volumes being made available for sale in the two channels.”
There are price variables between the two sales channels, although Venture says that it is inappropriate to compare the prices achieved through the different types of negotiations. However, he does admit that the prices achieved at auction will nearly always return a price closer to a buyer’ private value, which can often seem excessively high, but says Ventura, “Bidder’s prices are informed and reflect the value that company sees in the rough being made available at that time – nothing more, nothing less.”
Diamdel does not just offer regular highest-bidder auctions and utilizes a variety of tenders including Japanese auctions (bidders must bid at each level to remain in the running for the featured item) and Dutch auctions (the auction begins with a high asking price which is lowered until a participant is willing to accept the price). “Within the auctions channel we have continuously innovated with the design of our auctions to better provide clients with an equitable and informed method of securing the rough that they need for their operations,” says Ventura. “This is not done to confuse, but to provide as much opportunity as possible for as many clients as possible to have a fair chance of buying the rough that they need at prices they determine,” he says.
Although Diamdel regards the online auction method as a success, the company has no intention of moving all of its sales online. “We have maintained the same stance on this issue since day one,” says Ventura. “We see sales as different negotiation challenges and as such are not prescriptive that a ‘one best way’ to sell a given product week in, week out exists. Instead, we emphasize flexibility to our prevailing supply and demand conditions, adjusting our channel sales mix on a continuous basis.”
To date, 134 different diamond companies have bought goods at Diamdel auctions. In all, Diamdel has around 500 registered clients.
How Does the Auction Work?
According to the Diamdel website, E-Auctioning differs from traditional tender systems in a number of ways.
· It is a global process and participants from any part of the world can bid in auctions relevant to them [and goods may be viewed in multiple locations].
· Leading bids are not sealed, but are visible to all participants at the auction. Confidentiality is provided and identities are protected at all times.
· A buyer can make multiple offers (as opposed to a single bid tender) on a parcel and bid as high as they wish. A buyer will not lose a parcel by a few dollars while they are willing to continue bidding.
· Buyers can start bidding conservatively as opposed to placing their anticipated top price on the goods immediately. At times, Diamdel E-Auctioning may enable buyers to buy goods for less than the highest price they would have been willing to pay. For example, a bidder may enter a Diamdel E-Auction with a budget of 100 and buy the parcel for 95 if no other participants bid higher.
Notable Rough Diamond Purchases
It is not just in the polished sphere that fantastic diamonds are sold at auction as some of the big rough tenders have shown over the past few years.
478 Carat White Rough Diamond Sells For $18.4 Million
In December 2008, Safdico bought the “Light of Letseng,” a 478 carat white diamond mined in the Kingdom of Lesotho, via a tender in Antwerp. The manufacturing arm of Graff Diamonds paid $18.4 million for the rough, which translated into $38,494 per carat.
Gem Diamonds Limited, which recovered the rough from its Letseng le Terai Mine in Lesotho attributed the high price to the diamond’s top color and outstanding clarity.
39 Carat Blue Rough Diamond Sold For $8.8 Million
A rare 39.19 carat blue diamond mined by Petra in South Africa was sold for $8.8 million at a tender in the country to an undisclosed buyer. Petra recovered the diamond at the Cullinan mine, renowned as the world’s only significant source of blue diamonds.
$145,000 P/C For 7.28 Carat Rough Pink Diamond
In 2007, $1.054 million, or $145,000 per carat, was paid for a 7.28 carat, flawless intense pink, rounded octahedral diamond produced at Rockwell Diamonds’ Holpan operation. The diamond, sold at Rockwell’s tender in Johannesburg, was a record price for the company.
Safdico Pays $10.4M for 493 Carat Letseng Legacy Diamond
Safdico paid $10.4 million in 2007 for the 493.27 carat Letseng Legacy, at an auction hosted by the Antwerp World Diamond Centre. The diamond, mined at the Letseng diamond mine in Lesotho, reflected a price of $21,083.79 per carat.
Lesotho Promise Sells For $12.36 Million
In yet another tender coup, a D color, 603 carat rough diamond known as the Lesotho Promise was bought by Safdico for $12.36 million, or $20,497.51 per carat during a silent auction in 2006.